Cookies

We use cookies to customise content for your subscription and for analytics.
If you continue to browse the International Law Office website, we will assume you are happy to receive all of our cookies. For further information please read our Cookie Policy.

Your Subscription

We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.

Government adopts Tax Proposal 17 and submits dispatch to Parliament

Newsletters

On March 21 2018 the government adopted Tax Proposal 17, a new proposal for corporate tax reform. It is based largely on the draft issued in September 2017. The purpose of this new proposal is to set the basis for new rules on Swiss corporate taxation (the last proposal having been rejected in a nationwide referendum in February 2017) and to secure and enhance Switzerland's overall attractiveness as a business location. It is expected that parliamentary debates on the bill will be completed by the end of September 2018. If no referendum is called, the first measures will enter into force on January 1 2019 and the main part of the reform from will begin in 2020.

Under Tax Proposal 17, Switzerland will repeal the existing special corporate tax regimes (eg, finance branches, mixed, domiciliary, principal and holding companies). The bill further includes several measures that had already been previously discussed, but it now takes into account the criticism that contributed to the rejection of the February 2017 referendum.

Measures

The following measures are included in Tax Proposal 17:

The introduction of a transitional set of rules for companies that have been benefiting from cantonal tax regimes – such companies will, if reported correctly, effectively be subject to reduced taxation during a five-year period. The relevant rates will be at the cantons' discretion.

The introduction of a cantonal-level mandatory patent box in line with the Organisation for Economic Cooperation and Development standard – a 90% exemption is available on qualifying income (determined on the basis of the modified nexus approach), whereby software is excluded. The qualifying income is likely to include the development of intellectual property by related parties within Switzerland or by unrelated third parties abroad (ie, outsourcing). Embedded IP income must be determined based on the residual profit method. On entry into the patent box, previous tax-deductible expenses will be included in the taxable income. The cantons are free to determine the taxation modalities within five years following the election into the patent box regime.

The introduction of a 150% research and development (R&D) super-deduction for R&D costs incurred in Switzerland on a cantonal level, based on:

R&D salary costs incurred by the taxpayer, plus a 35% mark-up for other R&D costs; and

80% of the R&D costs invoiced by third parties in Switzerland.

The introduction of a maximum relief limitation – the combined tax relief at a cantonal level from the aforementioned measures should not exceed 70% (ie, they may not reduce the taxable income to less than 30%).

The cantons can introduce relief on the capital tax levied annually on equity capital.

The introduction of statutory provisions in relation to the tax consequences of companies (or business functions) entering Switzerland (full tax-free step-up).

The extension of foreign tax credit provisions to Swiss branches of non-resident companies.

Compared with the previous reform proposal, there are some notable differences:

The notional interest deduction (NID), which was heavily criticised in the course of the rejected proposal, was dropped altogether, even though the Canton of Zurich has repeatedly requested that such a measure be retained. It remains possible that the NID will be included in the new bill before Parliament or, if not, that it could be discussed in a future tax reform (eg, the Swiss withholding tax regime).

The maximum relief limitation on the combination of patent box, super-deduction and step-up tax depreciation was reduced from 80% to 70%.

The cantonal share in the federal tax revenues (currently 17%) will be increased to 21.2%.

As expected, Tax Proposal 17 also includes further measures which are meant to cross-finance the reform and garner wider political support:

the harmonisation and increase of minimal taxation of dividends derived by individuals resident in Switzerland from privately held qualifying participations (ownership of 10% or more) – at least 70% of the dividends will be subject to income tax in the hands of private owners;

the tightening of the rules regarding transpositions (which apply in private restructurings involving transfers of investments of at least 5% to personally controlled holding companies); and

an increase in child and education allowances (for employees) of Sfr30 per month.

The cantons remain free to reduce their corporate income and capital tax rates. Although not formally part of the Tax Proposal 17 package, most cantons still envisage more or less significant reductions of the cantonal corporate income tax rates as part of their cantonal implementation projects. Some cantons are expected to offer ordinary corporate income tax rates as low as approximately 12%. On average, the effective tax rates for all companies in Switzerland will be approximately 14.5% (including federal, cantonal and municipal taxes).

Effective tax rates for corporate taxpayers

Current tax law

After contemplated reform

Aargau

18.6%

18.2%

Appenzell Inner Rhodes

14.2%

12.7%

Appenzell Outer Rhodes

13%

13%

Basel City

22.2%

13%

Basel Country

20.7%

13.9%

Berne

21.6%

16.4%

Fribourg

19.9%

13.9%

Geneva

24.2%

13.5%

Glarus

15.7%

12.4%

Grisons

16.1%

14%

Jura

20.7%

15.4% to 17.5%

Lucerne

12.3%

12.3%

Neuchâtel

15.6%

12.5% to 13.5%

Nidwalden

12.7%

12.1% to 12.7%

Obwalden

12.7%

12.7%

Schaffhausen

16%

12.1%

Schwyz

15.2%

12.5% to 14.4%

Solothurn

21.4%

13.1% to 16.3%

St Gallen

17.4%

15.2%

Thurgau

16.4%

13.4%

Ticino

21%

17%

Uri

14.9%

12.5%

Valais

21.6%

16%

Vaud

21.4%

14%

Zug

14.6%

12.1%

Zurich

21.2%

18.2%

Weighted average

19.6%

14%

Comment

As opposed to the proposal that was rejected in February 2017, the current proposal appears to have attracted wider political support, especially from the cantons, large cities and municipalities.

The Council of States (the upper house of Parliament) is going to discuss the bill in its spring session (May 28 2018 to June 15 2018), the bill will then be transferred to the National Council (the lower house) for its autumn session (September 10 to 28 2018). Once both chambers are in agreement and the change of law has been published in the Federal Gazette, the standard 100-day deadline begins, during which 50,000 citizens may request that a popular referendum be held on the matter. If no referendum takes place, the first measures will enter into force quickly, potentially as early as the beginning of January 2019 (and the main part of the reform from 2020 onwards).

Companies should continue to review their structures and the effect of the proposed bill and take appropriate action in order to ensure a smooth and tax-efficient transition to the post-2019/2020 tax environment.

The materials contained on this website are for general information purposes only and are subject to the disclaimer.

ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.